Buying a car was never so easy and never before has the Indian consumer had
so many choices. Not only are there new models in every segment–from mid-sized
family cars to sports utility vehicles and luxury sedans–the car finance
market has also become very competitive. And while the customer today is very
much in the driver’s seat, the wide range of car finance options can be quite
bewildering. For most buyers, issues like choosing the best dealer and scheme,
picking a trustworthy lender and deciding which among the seemingly endless
permutations and combinations of financing schemes suits your purpose, can be
unnerving. How do you make sure that the car you are finally driving home is the
one you have got a great bargain on? Like elsewhere, information is power and it
is best to arm yourself with whatever there is to know on the subject.
Step 1: Best man in
So you have identified the vehicle of your choice? It’s now time to go after
the car dealers and negotiate a price. In this phase, your skills as a haggler
are on test, and there are huge monetary incentives to drive a hard bargain.
Such is the level of competition that virtually every dealer offers discounts or
‘subventions’ as they are called. And hold your breath, these discounts can
save you anything between Rs 3,000 to Rs 30,000 depending on the model, color,
dealers’ inventory status and timing of your purchase.
finance owner ship status
applicable, as you are the owner
is transferred to you
to be returned or lease period to be extended on payment of nominal rent
on perpetual basis
(Value Added Tax) if
tax if applicable
1% of annual rental**
1% of annual rental **
If you use the car for your business only.
Current rates in most states in India.
Dealers usually have monthly targets to meet and hence month-ends are the
best time to negotiate for heftier discounts. Besides, if you are one of those
who is not bothered about auspicious months and days, chances are that you will
get a better deal. The trick is to buy during the so-called ‘inauspicious’
months. Additionally, you can negotiate lower prices on a vehicle that may have
overstayed in a dealer’s showroom. So have you decided on your dealer? The
next step is to understand the different schemes on offer.
Step 2: The real deal…
It is a buyer’s market and there are schemes to suit every need. However,
for a better deal, examine the terms and conditions of a particular scheme
carefully. This will give you an opportunity to weigh the pros and cons of
various schemes before judging which one suits you best.
Margin Money/Down Payment: Simple and easily understood, this is the
most popular scheme and is offered by all financiers. The customer pays minimum
margin money upfront. The financier funds the balance. Interest is charged on
the amount funded and instalments are collected on the same day as disbursal of
credit. The margin money is determined on the basis of make and model, tenure of
the loan, and the creditworthiness of the borrower. The amount financed is a
percentage of the ex-showroom price of the car, popularly known as LTV (Loan to
Value Ratio). The LTV ranges from 75% to 95% of the ex-showroom price. Normally,
the financier expects you to pay for the insurance and road tax over and above
the margin money.
Instalment in Advance: These are usually 0% interest
schemes and margin money on the car is collected under the guise of advance
instalments. However, under this scheme, 100% value of the car is considered for
loan. Usually two to five instalments are collected in advance and are adjusted
against the last few instalments. What this means is that in a three-year loan,
if four instalments are collected in advance, then you repay only 32 instalments.
Structured Option: While monthly instalment is
constant in most schemes, a structured scheme offers built-in flexibility to
step-up or step-down the instalment amount. In a typical three-year structured
step-up scheme, instalments can increase progressively from year one to year
three. Conversely, in a step-down scheme, instalments would progressively
decrease from year one to year three. There could also be a combination of
step-up and step-down instalments. Financiers for salaried employees normally
offer this. This scheme is very useful to manage predictable upswings and
downswings of disposable income.
Security Deposit: In this scheme, 10% to 25% of the
value of the car is taken as a security deposit. This could be with no interest,
with simple interest or with compound interest. Theoretically, the financier
funds 100% of the value of the car but in reality, his exposure is lower by the
amount of deposit collected. The interest charged would be on the full amount
and the instalments will be collected on the same. The security deposit along
with interest if any, is refunded at the end of the contract. However, remember
that if the interest on the security deposit exceeds Rs 2,500 per annum, TDS
@11.5 % will be cut. Now that you have decided on your kind of finance scheme,
it’s time to zero in on the financier who can give you the best deal.
Step 3: The financier
Most car dealers have tie-ups with different private banks, including
foreign banks and non-banking finance companies (NBFCs). The interest rate they
offer and the terms of lending vary within a small range depending on the make
and model of the car, the loan tenure and the type of lending scheme. However,
remember that while opting for a loan from a lender attached to your dealer may
save you some legwork, it doesn’t always protect your interests.
However, if you do shop around, you’re sure to be rewarded
with better deals. Approach lenders directly and drive a hard bargain in the
same way as you did with the dealer. Some lenders may offer attractive interest
rates, on condition that you go to one of the dealers that they have an
arrangement with. Under this arrangement, the lender gets an incentive from the
dealer for directing customers his way. But if that means having to forgo the
discounts you may have negotiated with the dealer of your choice, the deal isn’t
the one for you. Ask for the same discounts that you had negotiated with your
dealer or threaten to walk away. The fierce competition usually forces the
lender to agree to the choice of dealer. They can’t afford to lose a customer,
can they? This way, you get twin benefits–best discounts you’ve negotiated,
as well as the best financing scheme.
Shubhendu Parth in
Read Before You Sign on the Dotted Line
Hidden costs: These can be typically in the form of service charges,
documentation charges and processing fee, etc all of which increase the total
amount of your loan. A financier could charge you a lower rate of interest but
may actually be extracting a lot more from you through any of these charges.
Typically, other charges like value added tax (VAT) and turnover tax (TOT) may
also have to be paid depending on the financier and the scheme. These too
increase the cost of your vehicle.
Pre-payment charges: Most financiers discourage one from pre-paying a
loan, as this is less profitable for them. So they levy fixed pre-closure
charges on the balance principal which at times can be as high as 4% of the loan
amount. What this means is that on a loan of Rs 4 lakh and a balance principal
of, say, Rs 2 lakh, you could end up paying pre-closure charges as high as Rs
8,000. And while some financiers allow for part pre-payments others insist on
only full pre-payments. Also, there are certain companies who only allow
pre-payment up to 25% of the principal in any given year. When comparing like
offers, it is important to check the pre-closure charges and terms if you intend
to pre-pay the loan before the contracted tenure.
Instalment due dates: Be careful about when you pay your first
instalment since this has an impact on the lending rate. If you pay your first
installment on the first day you will end up paying more since this does take
into account the fact that your principal loan amount is reduced by the first
EMI. But if you pay your first EMI a month later, interest will not be charged
for the first EMI. Naturally the second option is less expensive for you.
Amortization schedules: You normally pay monthly installments to your
financier. This amount has two components–an interest repayment and a
principal repayment. The amount paid towards interest and principal varies each
month. This is called amortization of the loan. Though financiers follow
different methods of accounting for the monthly interest and principal, it is
important to keep a tab on this, particularly if you intend to prepay the loan.
This will help you calculate the remaining principle accurately.